The Purchasing Process spotlights this process and its various users as well as analyzing the related process controls.
The purchasing process is an interacting structure of people, equipment, methods, and controls that is designed to accomplish the following primary functions:
Handle the repetitive work routines of the purchasing department and the receiving department by capturing and recording data related to the day-to-day operations of the departments. This is used to generate source documents (PO and receiving reports) and to produce both internal and external reports.
Support the decision needs of those who manage the purchasing and receiving departments by allowing managers to know which orders have yet to be filled.
Assist in the preparation of internal and external reports.
Organizational Setting
Internal Perspective
The purchasing manager usually performs major buying activities as well as the required administrative duties of running a department. The purchasing department receives requests from other departments about items they need and then they remit this information to the accounts payable department who must pay for the purchased goods. The purchasing department works with the receiving department, which is run by the receiving manager who is responsible for receiving incoming goods, signing the bill of lading, reporting the receipt of goods, and making prompt transfers of goods to appropriate warehouses or departments.
Description of Information Flows:
1. Purchase requisition sent from inventory control department to purchasing department
2. Purchase requisitions from various other departments sent to purchasing department
3. Purchase order sent to vendor
4. Purchase order notification sent to various other departments or to inventory management process
5. Purchase order notification sent to receiving department
6. Purchase order notification sent to accounts payable process
7. Goods and services received from vendor
8. Receiving notification sent to accounts payable and general ledger processes
9. Receiving notification sent to purchasing department
Goal Conflicts and Ambiguities in the Organization
-The goals of individual managers often conflict with overall organizational objectives. For example, the purchasing department will likely buy in large quantities to receive discounts and reduce ordering costs. This will unfortunately create problems for the receiving department and warehouse because of the increased costs of receiving, inspecting, and storing inventory.
-Ambiguity also exists in defining goals and success in meeting goals. One of the purchasing department’s goals may be to select a vendor who will provide the best quality products at the lowest price by a certain delivery date. However, one vendor probably will not satisfy all these conditions.
-Prioritization of goals and making trade-offs are often the keys to choosing the best solution.
External Perspective
The connection between an organization’s raw materials to their customers is their supply chain. There is a need to manage these links in the supply chain so that the right goods will be on our shelves, in the right amount, at the right time, at minimal cost, to create the max value for the customer. Supply Chain Management (SCM) is the combination of processes and procedures used to ensure the delivery of goods and services to customers at the lowest cost while providing the highest value to the customers. The supply chain Operations reference Model defines five basic components for supply chain management:
Plan – measure demand for a product or service and develop a course of action
Source – select supply sources and procure the goods and services to meet the planned or actual demand and authorize payments to suppliers.
Make – transform a product to a finished state to meet planned or actual demand
Deliver – this is the order fulfillment step. Receive orders, provide goods/ services, and invoice customers.
Return – perform post delivery customer support and receive defective/ excess products.
Supply Chain Management - ensures delivery of goods at lowest cost and highest value to the customer. Main goal is to increase product availability while decreasing inventory across the supply chain.
Two categories of SCM Software
1. Supply chain planning software - accumulates data about orders from retail customers, sales from retail outlets, and data about manufacturing and delivery capability to assist in planning for each of the SCM steps The most valuable, and problematic, of these products is demand planning software used to determine how much product is needed to satisfy customer demand.
2. Supply chain execution software - Automates the SCM steps; ERP software is assigned to this category as it receives customer orders, routes orders to an appropriate warehouse, and executes the invoice for the sale. Many of the connections between players in the supply chain are B2B automated interfaces.
Benefits of Managing the Supply Chain
-Lower costs to the customer
-Higher availability of product
-Higher response to customer request for product customization
-Reduced inventories along the supply chain
-Improved relationships between buyers and sellers
-Smooth workloads due to planned goods arrivals and departures, leading to reduced overtime costs
-Reduced item costs as a result of planned purchases through contracts and other arrangements
-Increased customer orders due to improved customer responsiveness
-Reduced product defects through specifying quality during planning and sharing defect information with suppliers during execution
Problems (and Possible Solutions) with SCM Initiatives
-Data is not collected or is not shared across functional boundaries (use an enterprise system)
Up-to-Date real-time sales data must be fed to the SCM demand forecasting system. An enteriprise system and Intranet (i.e.,B2B) connections typically facilitate this process.
Supply chain performance is not fed back to the planning system. Again, an enterpirse system can relay purchasing, receiving, transportation, and other logistics data.
Data such as customer, location, warranty, and service contracts, needed for post-customer support is not available. This data must be collected during sales processing and made available to the appropriate functions.
-Lack of sharing information between supply chain partners (work out issues in the planning phase)
-Inaccurate data within the supply chain can negatively affect the entire chain (implementation of controls)
-Over-reliance on demand forecasting software lead to inaccurate forecasts (use human experience also)
-Competing objectives can lead to unrealistic forecasts (deference to the modeling tools and to objective arbitration)
Paperless systems eliminate documents and forms as the medium for conducting business. Printed reports disappear and are replaced by computer screens displaying the requested data. Major roadblocks to this are more behavioral and are phasing out as a new generation of managers emerges. Although the purchasing process is not completely paperless, hard copy documents are held to a minimum.
Radio Frequency Identification (RFID) is a chip with an antenna that can send and receive data from an RFID reader. These readers do not require line of sight and can obtain data from chips attached to items packed within boxes as the boxes pass near a reader. Because they do not require line of sight, this has helped reduce theft of the tagged product. Right now, this costs around $0.30 and needs to be about $0.02 before this will be widely adopted.
Data Stores Used in the Purchasing Proces
Inventory Master Data-a record of each itmes stocked or regularly ordere
Vendor Master Data-stores information about approved vendors including vendor performanc
Purchase Requisition Data-Data on all purchase requisiton
Purchase Order Master Data-Open PO information including status of itmes on orde
Purchase receipts Data-lists items recieved.
Fraud
Purchasing is a part of the purchase to pay process that culminates with a cash payment. There is potential for fraud and embezzlement. There are two typical cases for fraud:
An employee that receives kickbacks for purchasing from a specific vendor. (This is also used for A/P Fraud)
A conflict of interest between his responsibilities to his employer and his financial interest in a company with whom the employer does business.
These scenarios are addressed through a company’s code of ethics and employees are periodically required to attest they have not engaged in these activities.
Chapter 12 – The Purchasing Process
The Purchasing Process spotlights this process and its various users as well as analyzing the related process controls.The purchasing process is an interacting structure of people, equipment, methods, and controls that is designed to accomplish the following primary functions:
Organizational Setting
Internal Perspective
The purchasing manager usually performs major buying activities as well as the required administrative duties of running a department. The purchasing department receives requests from other departments about items they need and then they remit this information to the accounts payable department who must pay for the purchased goods. The purchasing department works with the receiving department, which is run by the receiving manager who is responsible for receiving incoming goods, signing the bill of lading, reporting the receipt of goods, and making prompt transfers of goods to appropriate warehouses or departments.
Description of Information Flows:
1. Purchase requisition sent from inventory control department to purchasing department
2. Purchase requisitions from various other departments sent to purchasing department
3. Purchase order sent to vendor
4. Purchase order notification sent to various other departments or to inventory management process
5. Purchase order notification sent to receiving department
6. Purchase order notification sent to accounts payable process
7. Goods and services received from vendor
8. Receiving notification sent to accounts payable and general ledger processes
9. Receiving notification sent to purchasing department
Goal Conflicts and Ambiguities in the Organization
-The goals of individual managers often conflict with overall organizational objectives. For example, the purchasing department will likely buy in large quantities to receive discounts and reduce ordering costs. This will unfortunately create problems for the receiving department and warehouse because of the increased costs of receiving, inspecting, and storing inventory.
-Ambiguity also exists in defining goals and success in meeting goals. One of the purchasing department’s goals may be to select a vendor who will provide the best quality products at the lowest price by a certain delivery date. However, one vendor probably will not satisfy all these conditions.
-Prioritization of goals and making trade-offs are often the keys to choosing the best solution.
External Perspective
The connection between an organization’s raw materials to their customers is their supply chain. There is a need to manage these links in the supply chain so that the right goods will be on our shelves, in the right amount, at the right time, at minimal cost, to create the max value for the customer. Supply Chain Management (SCM) is the combination of processes and procedures used to ensure the delivery of goods and services to customers at the lowest cost while providing the highest value to the customers. The supply chain Operations reference Model defines five basic components for supply chain management:
- Plan – measure demand for a product or service and develop a course of action
- Source – select supply sources and procure the goods and services to meet the planned or actual demand and authorize payments to suppliers.
- Make – transform a product to a finished state to meet planned or actual demand
- Deliver – this is the order fulfillment step. Receive orders, provide goods/ services, and invoice customers.
- Return – perform post delivery customer support and receive defective/ excess products.
Supply Chain Management - ensures delivery of goods at lowest cost and highest value to the customer. Main goal is to increase product availability while decreasing inventory across the supply chain.Two categories of SCM Software
1. Supply chain planning software - accumulates data about orders from retail customers, sales from retail outlets, and data about manufacturing and delivery capability to assist in planning for each of the SCM steps The most valuable, and problematic, of these products is demand planning software used to determine how much product is needed to satisfy customer demand.
2. Supply chain execution software - Automates the SCM steps; ERP software is assigned to this category as it receives customer orders, routes orders to an appropriate warehouse, and executes the invoice for the sale. Many of the connections between players in the supply chain are B2B automated interfaces.
Benefits of Managing the Supply Chain
-Lower costs to the customer
-Higher availability of product
-Higher response to customer request for product customization
-Reduced inventories along the supply chain
-Improved relationships between buyers and sellers
-Smooth workloads due to planned goods arrivals and departures, leading to reduced overtime costs
-Reduced item costs as a result of planned purchases through contracts and other arrangements
-Increased customer orders due to improved customer responsiveness
-Reduced product defects through specifying quality during planning and sharing defect information with suppliers during execution
Problems (and Possible Solutions) with SCM Initiatives
-Data is not collected or is not shared across functional boundaries (use an enterprise system)
- Up-to-Date real-time sales data must be fed to the SCM demand forecasting system. An enteriprise system and Intranet (i.e.,B2B) connections typically facilitate this process.
- Supply chain performance is not fed back to the planning system. Again, an enterpirse system can relay purchasing, receiving, transportation, and other logistics data.
- Data such as customer, location, warranty, and service contracts, needed for post-customer support is not available. This data must be collected during sales processing and made available to the appropriate functions.
-Lack of sharing information between supply chain partners (work out issues in the planning phase)-Inaccurate data within the supply chain can negatively affect the entire chain (implementation of controls)
-Over-reliance on demand forecasting software lead to inaccurate forecasts (use human experience also)
-Competing objectives can lead to unrealistic forecasts (deference to the modeling tools and to objective arbitration)
Paperless systems eliminate documents and forms as the medium for conducting business. Printed reports disappear and are replaced by computer screens displaying the requested data. Major roadblocks to this are more behavioral and are phasing out as a new generation of managers emerges. Although the purchasing process is not completely paperless, hard copy documents are held to a minimum.
Radio Frequency Identification (RFID) is a chip with an antenna that can send and receive data from an RFID reader. These readers do not require line of sight and can obtain data from chips attached to items packed within boxes as the boxes pass near a reader. Because they do not require line of sight, this has helped reduce theft of the tagged product. Right now, this costs around $0.30 and needs to be about $0.02 before this will be widely adopted.
Data Stores Used in the Purchasing Proces
- Inventory Master Data-a record of each itmes stocked or regularly ordere
- Vendor Master Data-stores information about approved vendors including vendor performanc
- Purchase Requisition Data-Data on all purchase requisiton
- Purchase Order Master Data-Open PO information including status of itmes on orde
- Purchase receipts Data-lists items recieved.
FraudPurchasing is a part of the purchase to pay process that culminates with a cash payment. There is potential for fraud and embezzlement. There are two typical cases for fraud:
These scenarios are addressed through a company’s code of ethics and employees are periodically required to attest they have not engaged in these activities.
Control Goals